3 Home Buying Myths

1. Buying is always better than renting.  Even though buying a home has tax advantages and secures consistent monthly payments, home-maintenance can be expensive and time-consuming. Typically, buying is only better than renting if you plan to live in your home for 5-7 years or longer, which is roughly as long as it takes for homeowners to break even. Fannie Mae recently revealed that 23% of renters are postponing their plans to buy, and the main reasons people give for purchasing a home are non-financial (43% cited safety as the primary factor while 33% said school quality). One way to estimate whether it's more beneficial to buy is by calculating if the home costs more than 15% of the annual cost of renting a similar home. If  so, you'll get a better deal renting. Still can't decide which option is best for you? Use the rent vs. buy calculator to help or contact me for personal guidance.

2. Real estate is the best investment. Today, investors earn a higher return on investments in stocks than they do on real estate. Within the past 10 years, home prices have risen by only 0.3% annually whereas the S&P 500 has returned an average of 8.26%.  Financial writer Jack Hough cites that over the long run, stocks have rewarded investors with 7% inflation-adjusted return over long periods, while homes earned their owners close to 0%. This is partially explained by the fact that homes don't produce anything. Unless homeowners take measures to actively upgrade their homes, they can only increase in value as the ability of the people to purchase them rises. Appropriately, another Fannie Mae survey illustrated that the proportion of people who believe that buying a home is one of the safest available investments decreased from 83% in 2007 to 70% in 2014. Ironically, only 17% considered stocks safe at that time.

3. The bigger the down payment, the better. Putting down a 20% down payment means you won't have to buy mortgage insurance and you ultimately will borrow less (thus paying less in interest). However, it is not always necessary. You can pay a smaller down payment in exchange for buying PMI (private mortgage insurance) until you have enough home equity (usually 20%) to remove it. Increasingly popular FHA loans accept down payments as low as 3.5%. Smaller down payments (with mortgage insurance) may actually gain you better interest rates than a 20% down payment without insurance, since lenders feel safer when loans are insured. Additionally, saving for a large down payment takes time-home prices may rise in the meantime, or you could miss the opportunity to buy a home you truly love. Smaller down payments ensure all off your money is not tied up in home equity, allows you to diversify your investments (for example, across stocks), and still permits you to pay off the loan early and quit paying mortgage insurance once you put 20% down.